THE STOCK MARKET: Too late for Web IPOs?

Internet stocks’ volatility is giving some investors pause

The white-hot valuations of Web stocks may be starting to cool, which could translate into disappointment for catalogers that have not yet taken advantage of the ‘Net frenzy.

The Aug. 3 public offering from Web marketer 1-800-Flowers could be the first sign. Although the initial public offering (IPO) garnered Westbury, NY-based 1-800-Flowers $126 million, some viewed the IPO as lackluster. While some Internet marketers’ stock values have tripled from the asking price, shares of 1-800-Flowers did not even meet the asking price of $21 per share. By the end of the stock’s opening day, the price had fallen to $18.19 a share, 13% below the asking price. And as of Aug. 6, the share price had slid to $15.

Moreover, numerous Internet stocks listed on Nasdaq took a beating in a market slide in early August. As of Aug. 4, the share prices of major Web players, eBay, and fell 6 7/18, 8 5/8, and 6 13/16 points, respectively. Though these and other Web stocks quickly rallied, thanks largely to an influx of bottom-feeding investors, the turbulence indicates that ‘Net stocks are far from a sure thing.

“Investors may be getting tired of Web-based IPOs,” says Kevin Silverman, an analyst at Chicago investment bank ABN AMRO. But he also notes that overall market volatility, coupled with fears of rising interest rates, may have been the culprits for the August slide as well.

Others in the catalog industry are a bit more skeptical of the Web IPO frenzy. Mitch Siegler, president of San Diego-based Eastern European gifts catalog Sovietski – and a former Wall Street venture capitalist – says, “Eventually, it’s going to be `put up or shut up’ with a lot of these Web-only businesses. It’s hard to understand that businesses with only a few million in revenue are being valued in the billions of dollars, even ahead of some old-line companies with proven earnings performances.” The Web IPO frenzy, he says, “does not make sense to me.”

And recently, Merrill Lynch analyst Henry Blodget was quoted in a CNET news report as saying that three-quarters of ‘Net firms “will be acquired or fail.” He also said that Merrill Lynch is worried about the firms “that are third, fourth, or fifth in their particular market segments.”

But for every doubter, there are many more believers. “As long as the Internet valuations hold up, spinning off via Web IPOs is still a good idea,” says Nick Holland, managing director of Boston-based investment bank Ulin & Holland. For those catalogers with substantial Web sales – say, tens of millions of dollars – not doing a separate Web IPO, he says, “is like leaving money on the table.”

In fact, just a few months ago, catalogers that spun off their Web divisions were garnering huge valuations. (See “Cashing in on the e-commerce frenzy,” August issue.) New York-based teen marketer Delia’s, for one, spun off its iTurf Internet business in April, raising more than $90 million. Initially priced at $22 per share, the stock ballooned to $66 a share in the next day’s trading, momentarily valuing iTurf at $1 billion – more than 250 times its revenue in the previous fiscal year.

Similarly, New York-based bookseller Barnes & Noble in May took in $486 million after taking its Internet business public, the largest-ever e-commerce initial public offering.

According to New York-based information services consultancy Winterberry Group, the total market capitalization of 25 leading direct marketing firms is $18.2 billion. By contrast, of the 25 leading Internet businesses, the total market capitalization is $72.2 billion. “Anything with a `’ extension is getting a huge amount of play these days,” says Mike Petsky, a principal at Winterberry.

The trick is fulfilling the promise.

But for catalogers hoping to cash in on the Web IPO mania, “the danger lies in fulfilling the promise of the high valuations,” says Mal Appelbaum, a principal at New York investment bank Wand Partners. He cautions catalogers about their ability to enhance their businesses once the IPO has been completed. For instance, Appelbaum believes that online bookseller did the right thing by using its IPO cash to build value by acquiring companies with acquisitions such as Catalogers must be able “to create the reality that matches the hype,” he says.

Such problems don’t seem to be deterring catalogers anxious to raise funds from their ‘Net ventures, however. North Bergen, NJ-based cataloger/retailer Vitamin Shoppe in July filed with the Securities and Exchange Commission to spin off its Web subsidiary, The privately held Vitamin Shoppe mails

14 million catalogs a year; its Web business, launched in April 1998, had first-quarter revenue of $2 million.

Also in July, $546.1 million multititle cataloger Hanover Direct hired investment banking firm Bear Stearns to investigate the possibility of spinning off its Web business.

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